For-profit colleges face mounting scrutiny

Commercial schools continue to see rising stock prices despite a rash of bad news.
Commercial schools continue to see rising stock prices despite a rash of bad news.

Officials at for-profit colleges and universities are facing a chorus of public criticism after accusations of shady student recruiter practices and a U.S. Department of Education (ED) report that showed twice as many students at for-profit schools have defaulted on their college loans as students attending nonprofit and public colleges and universities.

The mounting criticism comes as new research suggests for-profit colleges are gaining market share among online learners as the recession drives more people back to school.

Students who took out loans to pay for education at commercial institutions such as the University of Phoenix and DeVry University had a 21-percent default rate within three years, according to the Dec. 14 ED report, which used data from students who began loan repayment in fiscal year 2007.

For-profit schools’ default rate in fiscal 2006 was 18 percent.

Overall, American college students defaulted at a 12-percent rate, up from 9 percent the year before.

The rising default rates could affect commercial universities’ government funding. Starting in 2012, schools that have a 30-percent loan default rate won’t be eligible for federal student aid programs.

For-profits hovering close to or beyond that 30-percent default mark include seven Kaplan University schools and 22 Everest College campuses, according to the government analysis.

Among the nation’s largest institutions, the government data indicate a three-year default rate of 15.9 percent at University of Phoenix and 17.1 percent at DeVry University.

About 5 percent of colleges and universities evaluated in the ED report had loan default rates of 30 percent or more. Eight out of 10 of those schools were commercial colleges.

The data do not include private student loans, just government-backed loans.

Harris Miller, president and CEO of the Career College Association, an organization that represents for-profit colleges, said the jump in default rates is symptomatic of a severe economic recession.

For-profit schools, he added, often accept more low-income students than public and nonprofit universities.

“If you accept low-income students, you’re going to have high default rates,” he said in an interview with the Associated Press. “It has nothing to do with whether you’re for-profit or not.”

For-profit recruitment practices draw fire

A day after ED released its report, Apollo Group Inc.—the University of Phoenix’s parent company—agreed to a $78.5 million settlement after a six-year court battle that started when former university employees filed a lawsuit claiming recruiters were paid based on the number of students they enrolled, a practice that violates federal law.

Apollo Group denied the former plaintiffs’ allegations, dismissing them as disgruntled former employees and claiming the school’s recruiting practices were within federal guidelines.

“This agreement not only brings closure to a long-running dispute and enables the company to avoid the uncertainty and further expense associated with protracted litigation, it opens the door for a more constructive partnership with our lead regulator, the U.S. Department of Education,” Charles B. Edelstein, Apollo’s co-CEO, said in a statement.

The hefty settlement did little to quell public criticism.

Congressman Elijah E. Cummings, D-Md., urged lawmakers to launch hearings to investigate common practices in publicly-traded colleges and universities. A Congressional investigation, Cummings said, would “shine a light on the for-profit education industry and provide the American people with a clear picture of the true costs of education.”

“The pattern of behavior reported is disheartening at best, and infuriating at worst,” Cummings said in a statement posted on his web site. “At a time when our economy has afforded no luxuries to America’s working classes, to find that for-profit institutions allegedly drew students in with disingenuous claims and sometimes outright fabrication, subjected them to onerous loans, and left them often unusable ‘credits’ is inexcusable.”

Cummings’s call for an investigation into the for-profit college industry was spurred by a report from ProPublica — a nonprofit organization based in Manhattan that examines public policy.

Manny Rivera, a University of Phoenix spokesman, said ProPublica — run by former managing editors at The Wall Street Journal and The Oregonian — included dubious claims about commercial universities in its Nov. 3 story, “At University of Phoenix, Allegations of Enrollment Abuses Persist.”

“ProPublica is a partisan and experimental investigative newsroom known for ‘muckraking tactics’ and ‘hatchet jobs,'” Rivera said. “University of Phoenix hopes to have the opportunity to provide the congressman with the facts, as the allegations contained in the ProPublica piece are wholly imbalanced, subjective, and salacious.”

A former University of Phoenix instructor based in Michigan said he witnessed a gradual erosion of acceptance standards from 2000-06, when he taught online finance courses for undergraduate and graduate students.

The former teacher spoke to eCampus News on the condition of anonymity so he could detail his experience at the university without being identified by Phoenix officials.

During his first three years teaching Phoenix online courses, the former instructor said his classes consisted of about 10 students, most of whom were adult learners looking to earn a degree and supplement their resumes.

By 2004, the instructor said, the university’s change in admission requirements made his class sizes balloon to 20 students. And many students were recent high school graduates who needed remedial courses or adults whose first language was not English.

The instructor said lesson plans had to be halted or delayed while he explained basic concepts and requirements to a handful of unprepared students.

“The quality of students declined precipitously when that happened … and the educational experience really suffered,” he said. “I had to deal with an unbelievably bad situation.”

“I had to spend a highly disproportionate amount of time with those students compared with other students,” he added. “And that was detrimental for the really good students in my classes.”

During his last year teaching Phoenix finance classes, the former instructor assigned students a project that involved analyzing a company’s financial disclosure documents and—using graphs and charts—explaining if they would invest in the company.

He said two students who struggled throughout the semester simply printed out companies’ disclosure papers and turned them in as their final project.

“The papers were 20 pages of plagiarized text that weren’t even relevant or germane to the project,” the one-time instructor said. “They just wanted to reach the page requirement.”

The former instructor, who now works as a hiring manager, said if he reviewed a job applicant’s resume that showed he or she had graduated from the University of Phoenix in the past five years, the applicant would instantly be crossed off his list of potential hires.

“I would not even consider them,” he said. “The [University of Phoenix] program has been so watered down, it’s not even close to what it used to be.”

Rivera, the university spokesman, said the company lowered the minimum student age to 18 in response to “the number of younger working learners desiring admission and the gradual shift of our curriculum to accommodate a stronger general education component for students who had little or no previous college experience.”

He said the age requirement shift didn’t change Phoenix’s clientele.

“With the working learner demographic shifting to include a younger student who increasingly had little previous exposure to higher learning, University of Phoenix evolved into a truly comprehensive institution, capable of serving an expanded student population, inclusive of younger, less academically experienced students who, despite their youth, were still considered ‘nontraditional,'” he said.

SEC probes Apollo’s accounting practices

In late October, Apollo said the Securities and Exchange Commission (SEC) had launched an “informal inquiry” into its revenue accounting practices, its second SEC probe this year.

SEC inquiries often end without finding harm done by the company. Still, the probe comes at a time when ED is keeping an eye on the sector at large.

In a Congressional hearing earlier in October, Mary Mitchelson, an inspector general of the Education Department, described investigations of different schools’ attendance-tracking and financial aid practices. She said the government would continue to pursue cases of “diploma mills” and eligibility exams.

In February, a separate division of the SEC said it was looking into Apollo’s revenue recognition practices. Nearly all of Apollo’s revenue comes from student tuition. Federal student loans from the government make up nearly 90 percent of the University of Phoenix’s tuition income.

The “revenue recognition” issue revolves around how Apollo determines when a student drops out of a class, the refund that student gets, and how much income Apollo can leave on its balance sheet, and for how long.

Apollo says it stops recognizing revenue when a refund is processed for a student that has dropped a class, according to attendance records—a “seemingly straightforward” method, said Morgan Stanley analyst Suzanne Stein.

The worst-case scenario would be an accounting restatement and fraud charges as a result of the inquiry, Stein said. She added that was unlikely, and also that there was “no reason” to think the inquiry would be expanded to the rest of the industry.

For-profit colleges defend practices, deflect criticism

Decision makers at well-known commercial college chains have countered mounting public skepticism by announcing new measures designed to trim the growing number of students defaulting on their loans after three years.

San Diego-based Bridgepoint Education, parent company for University of the Rockies and Ashford University, released a statement Dec. 8 that detailed plans to help students manage loan payments once they’ve left school or graduated.

The Bridgepoint plan includes “hiring additional internal administrative and experienced management personnel to assist students who have left the institution and are in repayment, as well as contracting with an external default management firm to implement a comprehensive student-default management plan.”

“By the time the three-year rates apply in 2012, we expect that the investments we have made and the organizational changes we have instituted will allow us to maintain” default rates under 30 percent, and therefore within federal funding guidelines, according to the company’s statement.

Bridgepoint’s Ashford University experienced a three-year rate jump from 6.1 percent to 17.4 percent.

For-profit school officials said the industry is unfairly criticized while public colleges avoid media scrutiny and condemnation from local and national lawmakers.

Arthur Keiser, chancellor of Keiser University, a family-owned chain of 13 campuses across Florida, said many four-year schools pay recruiters when they enroll international students—a practice not often brought to public attention.

“It’s a worry that the press is taking one lawsuit and making it a big issue,” said Keiser, the university’s chancellor for 30 years. “There isn’t a university in this country that doesn’t have multiple lawsuits going at the same time. It’s pretty easy to sue anybody.”

He added: “Incentive-based compensation has been used everywhere. And people just don’t understand the circumstances.”

The rash of negative publicity hasn’t damaged commercial colleges financially. Millions of Americans have returned to school during the economic downturn that began in fall 2008, and many of them have turned to for-profit campuses.

The majority of the nation’s largest for-profits saw a 20-percent enrollment increase in 2009, according to industry analyses. DeVry University, which has 65,000 students on 90 campuses across North America, saw a revenue increase of more than 30 percent this year.

The Illinois-based company said Dec. 8 that undergraduate enrollments rose 22.7 percent to 64,003, up from a 16.9-percent jump in 2008.

According to new data from research and consulting firm Eduventures Inc., for-profit colleges’ share of the online-learning market rose from 39 percent in 2008 to 42 percent in 2009, as the poor economy drove people—many of whom have families or other responsibilities—back to school.

Apollo Group’s stock shares rose by about 10 percent in the hours after the company’s legal settlement was announced. That increase came on the heels of a 45-percent third quarter jump in profits.

For-profit institutions, Keiser said, are too often “bunched into one big group” with career training schools whose students have some of the highest default rates in the country, distorting the image of reputable commercial campuses that abide by federal rules.

“We’re dumped into the same group with a cosmetology and truck driving school in inner-city L.A.,” he said. “With the economy getting bad, we don’t think we’re going to have a loan default problem? … That’s just not realistic.”


Federal Student Aid Data Center

University of Phoenix

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